The WTO’s Moratorium on Customs Duties Applied to Electronic Transmissions.

Readers will recall that this issue has long been on EFA’s agenda, starting back in 2020. The Agreement must be renewed every 2 years. In 2019 a UNCTAD researcher published an unofficial paper that claimed that the developing world was losing “billions of US$” by not applying duties to electronic transmissions. In 2022 India and SA threatened to veto the Moratorium (which must be agreed unanimously at WTO), however, eventually they voted in favour, calling on WTO to define an “electronic transmission”. This has been addressed in a recent OECD paper, but as commentators have pointed out the definition is bound to change as technology develops. For example 26 years ago when the Moratorium started we had no Zoom or Teams, no blockchain or AI, no Netflix. SA, India and Indonesia are all threatening to veto the Moratorium this week. Below is an extract from EFSA’s letter to the SA government.

“Government policy has repeatedly recognised the urgent need to digitalise SMEs/MSMEs, inter alia to promote entrepreneurship among women, youth and disabled persons. Ecommerce is one means to drive this policy and support inclusive financial and communications.  If customs duties are imposed on cross-border electronic transmissions, it will become more expensive for South African entrepreneurs to digitalise.  We are greatly concerned that if the Moratorium is not renewed our businesses will be adversely affected and additional inflationary pressures will be introduced into the RSA economy. As a business interest, EFSA notes that the practical aspects of imposing customs duties on electronic transmissions have not been quantified. Business needs a predictable investment climate to operate, particularly in the present economic environment.

 It has been claimed that developing countries “lose billions of US dollars” in customs duties each year due to the Moratorium. However, existing studies show that the moratorium has a relatively small impact on fiscal revenues. A recent IMF analysis indicates that imported digitized products within the scope of the moratorium are best taxed through existing domestic consumption taxes, such as value added tax (VAT), where collection methods can be adapted for digital transactions. Furthermore, a new paper published last week, “Impact of Cross-Border Digital Transmissions on MSMEs in South Africa” by Messrs Badri Narayanan Gopalakrishnan, Chandni Dawani, and  Edmund Nxumalo, makes a powerful argument that should the Moratorium not be renewed, MSMEs in the RSA would suffer.

 We recognise that the agreement fails to define “electronic transmissions”, which makes any research on the monetary aspect of the Moratorium difficult to quantify. Treasury has been asked to study the potential benefits/risks, but has in our view failed to explore the practicalities of imposing customs duties on cross-border electronic transmissions, or of quantifying the risks of voting against the Moratorium.

Customs duties can either be applied to the medium (the bits and bytes) or to the content, or to both the medium and the content.

Those in favour of removing the Moratorium have failed to consider that putting a value on electronically delivered services (content) differs fundamentally from applying tariffs to imported physical goods. A service (for example software) delivered by the internet can be downloaded from the country of origin once and subsequently distributed to buyers. In that case there would only be one cross-border transmission.  The amount collected by SARS for such cross-frontier transfers would be minimal even if the top level of duty was applied.

 If we consider that at present software is usually downloaded from its origins in order to ensure that the latest version is available, and that once installed the seller often provides regular patches for cybersecurity and updating purposes, the question arises – would a customs duty be applied to these patches and how could they be valued, and what risks would apply if the buyer refused to accept a patch due to additional costs caused by the tariff?– cybersecurity would be jeopardised for example.

 In the case of the tariff being applied to the medium, we have a similar concern. In the case of business services or cross-border payments, would the user be charged duty each time a cross-border electronic transmission was made? – if so the costs of such business services would become impossible to calculate.  There are a multitude of other examples where cross-border transmissions are used on a daily basis by RSA citizens, businesses, educationalists, health practitioners, researchers, and government itself. At present these all benefit from the Moratorium.

 The application of a customs duty on cross-border electronic transmissions therefore opens numerous rabbit-holes down which government and business will have to go in order to achieve solutions. Whatever those solutions might be, they will create extra costs which will feed inflation and cause additional undefined costs. For example, if the Moratorium falls, customs tariffs will apply to an enormous number of entities which presently do not have any experience of customs procedures. The costs faced by entrepreneurs are not only the tariffs but also new administrative costs. Many RSA companies – not least SMEs – will be hurt and slowed down in their digitalization. This will reduce RSA competitiveness, while increasing the cost of living for citizens and unemployment,.

 The other major risk which concerns EFSA is the strong likelihood that all those countries that vote for the continuation of the Moratorium will simply create a new international agreement, should the present system fall. The RSA would be excluded from this and from the benefits of a new Moratorium. According to the WTO, the RSA is one of the largest contributors of digitally-delivered services in Africa, accounting for an 18% share of Africa’s export of digitally-delivered goods. This includes content (films, animation, music, gaming programmes, etc.) which is a sector the government is keen to promote. Most of these services would have customs duties imposed on them, by our neighbours in Africa and by the rest of the world, including all or most of BRICS. That would have severe repercussions on the RSA’s global competitiveness.”